What Home Price Can You Really Afford? Do This!

So you're looking to buy a house, but how do you know how much you actually would qualify for? In today's video, as you guys can see, I'm joined by Jim Black, once again, who's been a licensed loan officer for 20 plus years. So Jim, if someone's looking to buy a home, let's just say their first time home buyer, how they actually figure out how much they can afford in today's market. Thanks for having me on, Jason. And yes, we want to make sure that you know before you owe. So what we'd like to do is kind of break down a simple spreadsheet to kind of allow people to understand what goes into qualifying. And remember, we're showing you a spreadsheet on the maximum you can qualify for. But what's most important is what you're comfortable paying. So just because you can do something does not necessarily mean you should do something. So please keep that in mind when you're looking at the spreadsheet we're going to share in our example. Again, we're looking at guidelines. We're looking at interest rates and loan terms today when the video is being filmed. And I have the dates on this spreadsheet, too, to have that for reference. So the biggest thing comes down to, Jason, honestly, the ability to repay or ATR, we call that. And we look at really income assets and employment as the really big factors for that. The way we look to justify the debt to income ratio or your DTI is looking at your overall debt, that's car loans, student loans, credit card debt, along with your housing payment, known as your PITI, all those things together. We look at that holistically and we come up with a formulated percentage of what your gross income, gross being your before tax income, can use to qualify in terms of a loan and a purchase price. Those guidelines are based upon the gross income. But remember, your income you take home is after tax. So again, just because you can do this does not necessarily mean you should do this. So please keep that in mind. So if we could go to our example, Jason, I'd love to share a breakdown of what goes into qualifying a payment. So what we have here in our example, and you can explain it if you like, Yeah, let me zoom in. I would kind of reiterate what you said. I always tell people that just because a loan officer tells you, hey, you qualified for $600,000 does not mean that you should go buy one. It just depends on the payment you really are comfortable with. So what you said is spot on. But continue. Thank you. So we have a purchase price in this example of $600,000, putting down 10%, which is the 540 loan amounts. And with an interest rate of 5.99%, that's on a 30 year fixed, with no prepayment penalty on owner occupied purchase, that APR is 6.11% is for reference. So if you look on the right side in the red, I put it big in red, because that's the biggest thing to think about is read your housing and debt ratio to be below 43%, which means of your overall income for your wife, for you, for whoever's a borrower on the property, we look at your overall debt and the overall income for the borrowers and has to be combined of less than 43%. This is for most products. There's conventional loans, jumbo loans, VA loans, FHA loans, all kinds of programs. But in general, we want to make sure you're at 43% or less. So one thing I want to mention too, when you mean that this ratio, you're looking at their total debt payments, but on top of that, their housing payment would be their future housing payment if they were to buy a home, correct? Exactly. Now let's scroll down to that, because this shows you an overview of what you would need to make income wise, but let's break down the payment itself. So here on the left side of the screen, you will see what goes into an overall payment. You obviously have the principal interest payment on the loan, right? Based on the loan amount and the interest rate and the term of the loan. You have property taxes, which is normally based about one and a quarter percent in California of the purchase price. What's interesting is 1% of that overall fee goes to the state of California, for example. And then about a quarter percent are things for local things, maybe schools, safety, roads, whatever those things might be. In addition, we have an estimate here for home insurance of $125. Again, I'm putting estimate clearly in this to let people know that that could be higher or lower, depending if you're in a flood zone, high fire area, in an urban area, in a rural area, it just depends where you live. Yeah. New house versus older one too. Exactly. It varies quite a bit. Yeah. Exactly. And one other category I've left out here is the HOA fee, homeowners association fee. Jason, in Sacramento, what can that vary? Is that a couple of hundred bucks? Yeah, it can be a wide range. HOA can be $25 a month, or it could be $200 plus. It depends. And for the most part, yeah, this example for new builds, like a new home construction that has a rec center, for example, you're looking at your taxes and HOA to be quite a bit. So to answer your question, let's just say $75 for a newer community within Sacramento. But of course, everyone watching this video could be anywhere. So you just type in your HOA for the home you're looking to buy. Exactly. So now we have an overall housing expense. So just for my housing expense, to buy a house that costs $600,000, putting down 10%, it's going to cost me about $4,000 a month for everything. In this example, if I had no other debt, if I had other debt, I'd add that debt here, obligations, right? Auto loans, student loans, credit card debts, that would be factored in, including the housing payment into that overall debt to income ratio or housing ratio over here in red on the right. So simple math allows me to change the numbers here. If I make $800,000, $8,000 a month of gross income, my housing ratio is way too high. If I made $10,000 a month, I am in a better position on a lower housing ratio than 43%. Again, the biggest thing comes down to your comfort level. I want to make sure that you have the ability to make savings for 401ks, for college savings for 529s, maybe hobbies or vacations or other investments. So just because you can borrow up to 43% of your overall gross income, you may not want to go that high. Make sense so far, Jason? Yeah, absolutely. I mean, the big picture here is that you want this ratio to be less than 43%, but if your comfort level is like 30% and you want some buffer, you still want to save money for vacations or whatever, then it's really depending on your goals. And if you have any debt, like Jim mentioned there as well, that's really going to impact the amount you qualify for as well. For that, Jim, if you have like credit card debt, for example, what do you use for the monthly payment there? Let's say we had $1,250 of credit card debt. I'm just doing this real time. Let's see if I'm good at this. I might be good at this. I'm not sure. You can see right now, actually, my spreadsheet works. Yay. You can see right now, I added in $1,250 of debt. So I'm way above the 43% housing ratio. Do you see that there? Yep. Right. So you need to earn more or you would reduce the purchase price. Yes. Let's reduce the purchase price. Let's find our number that we qualify for. Let's go down to 550, for example. Still too high. Let's go down to 500,000. Still too high. You can see that the ratios are changing, right? So in this example, which is really interesting, is if I did not, what I would do in this example, if I had the ability to put down 20%, for example, what I would do is I would just wipe out that debt, whatever that amount of debt is at the closing of my purchase. So that way I could afford more home. We started this at $600,000. We dropped the price by $200,000 because we had a payment of $1,250 additional. So that's a really good indication that if you had the ability to put down 20% with credit card debt, you should not. You should look at deleveraging or paying off higher expenses you have in your lifestyle. That's going back to that blended rate mindset. What are my debts? I don't need to put down 20%. I could put down 10%. Knowing that leverage point, you can do a good debt versus bad debt. Good debt would be a debt where you own the actual asset like a house versus a credit card debt. So in this example, again, that difference in expense really makes a difference in the overall ability to borrow. So I'm putting my pieces back together and you'll see again that for a $600,000 purchase price in today's interest rate environment with 10% down, I got to make about $112,000. That's a good rule of thumb, right? So now I have a good ballpark. I can take this to my family and say to my wife, hey, our combined income is 100 grand. We can look for a range of 500 to 575 putting down 10%. Maybe you have more money. Maybe you have a gift from your family members. Maybe you've stolen a property and have a larger down payment. Those things all play a role in the factors of this stuff. So you can play around all these spreadsheets. We love empowering our consumer and clients to really understand how the ability of repaying makes a difference and get them to their goals. Again, just because you can borrow 43% of an overall payment, you probably don't want to do that if you have a Comcast bill for $200 a month or a Verizon cell phone that's $125 or your kid's doing extracurricular activities or sports after school. So again, just having this information, knowing before you owe is the power of a spreadsheet like this and working with local professionals, both in mortgage and real estate that can guide you in the right direction. And Jason, as a realtor, if I gave this sheet to you and showed you that I did not have an HOA fee in here, and if that HOA fee was like 500 bucks a month, it would knock out my ratio substantially. So if I had a $500 a month HOA, I'd have to lower my purchase price by about $75,000 to qualify. It's wild. Pretty crazy, right? So again, we need to know what the overall payment is. And ironically, we had a number earlier that was about $3,975. We're at a similar payment and we bought $75,000 less of a house, which probably means a bedroom and a bathroom less, right? Or maybe a townhome versus a single family home in certain areas. Just a powerful way of looking at all the different parts of what goes into qualifying for a property. A good rule of thumb also, just take your income. Hey, I make 10 grand a month. 10 grand times 0.43, I can qualify for up to $4,300 of total debt outstanding on a monthly basis. Yeah. If you do not have any other debt, right? Exactly. And that, unfortunately, people have other debts or they forget they have other debts. Oh, I forgot about that. Or hey- Student loans. Yeah. I have student loans that were forgiven. And again, we are going to always qualify you, even if you don't have a payment on student loan debt, unless it's for sure forgiven. And in writing from the government or the state, we're going to qualify you either a half a percent or 1% of that overall debt, just to make sure if that payment shot comes back, you can still afford your house. Because that's a better asset to have than credit card or student loan debt. Definitely. I don't think anyone would say a credit card's an asset, that's for sure. No. Can we talk about fees also while we're on here? Yeah. Yeah. Let's do that. Absolutely. Awesome. It's important to understand that every lender has different fee structures. And there are third-party fees, there are prepaid items, and there are lender and title fees. So in this example, you'll see that the title fee is the insurance fee. This is a very low number. This should be more probably like $2,500 on average in California. Again, it depends on the loan amount, the purchase price, and the area you're buying. Underwriting fee refers to the lender doing their underwriting to qualify you. That's the judge fee, basically. The underwriter is a judge. Processing and dock fee, that's normally for loan documents, disclosures, getting docks ready for signing. An appraisal fee can be anywhere from $500 to $750. So let's put $600. And you have a credit report fee, $84 roughly. So the total fees on this average transaction equal about 1% of the purchase price. It's a good rule of thumb. I'm buying a property for $600,000. My closing costs are going to be about $6,000, which means my cash-to-close number is the 10% number for $60,000 plus the estimated $6,000 of fees. There could be other things like transfer taxes. There could be other things specific to the county or city or in your contract, but just know this is a good rule of thumb. And there are maybe prepaid items like home insurance policies or prepaid interest for up to 15 to 30 days. So just be aware of these are the things that go into this. And like any good lender, this is not a lock or a commitment to lend. Always get a legal loan estimate that we can provide once we have a full application to give you precise numbers specific to your goals. Yeah. One thing on the realtor side that I will say too, that we've had clients recently who have bought houses and we've had the seller not only pay for the commissions that we asked for, but also gave our clients a closing cost credit as well. So that could decrease your out-of-pocket expenses in buying a home using a loan as well. Absolutely. And again, we want to look at your overall debt. And one of the cool things I love about veterans loans, we specialize in VA loans for the military veterans or active duty people on the call or on the podcast. Thank you for your service. We can actually through VA loans, if you qualify, pay off other debt you have. So give you a higher loan balance than the purchase price to put you in a better situation to afford your housing payment. We can also have a seller of a property help give credits for some of those things also, which is really cool. So again, if you have a car loan or your student loan debt, you've been on active duty and you've deployed somewhere and come back, a lender or a seller can give you additional funds in a loan amount or in credits to be able to wipe out other debts that could be hurting your overall housing ratio. Right. Absolutely. Good point, Jim. Well, thank you, Jim. And then of course, we'll provide a link below if you guys want to book a call with us, free, no obligation. Everyone's real estate goal is different. So we actually love talking to people who find us through YouTube. So thank you, Jim, for joining us in today's video and everyone watching today's video. Then of course, reach out if you guys want to talk about your real estate goals. With that said, please like and subscribe and we'll see you on the next video. Thank you very much.